Surprising even hardened financial "experts" who expected the Spain bank bailout to "work" for as much as several hours, the bailout has actually failed before being formally announced — a new speed record that should, by all reason, be allowed to stand forever. The causes of this lightning collapse should be understood, so that bank bailouts be buried forever.
The Wall Street Journal reported that Spanish government bond yields ROSE on Monday morning, to 6.54% for a 10-year bond, three-tenths higher than the June 8 closing level which helped panic Spain's government into "requesting" the bailout. Credit-default swaps on the Spanish government zoomed higher in price. And contagion occurred: Spanish debt dragged Italian debt to a 10-year yield of 6.04%, up more than a quarter of a point from June 8. One may be sure that the same thing is happening with Eurozone bank debt, as with sovereign debt, this bailout Monday.
The "agreed" bailout was to pile 100 billion euros in new debt on top of Spain's sovereign debt, and on top of the bonded and short-term debt of Spain's bad-asset-loaded banks. The mechanism was to be a credit line from some EU bailout fund, which Spain's bank restructuring agency would use to replace the capital of banks, which would have agreed to write off SOME of their bad assets, thus impairing (reducing) their capital. It might have been predicted that the 100 billion euros would shortly be used up in this manner, leading to requests for more bailout.
For bad-asset-loaded, undercapitalized, overleveraged banks, this new debt does not improve the situation, as the Greek default-and-"haircut" proved. The new debt is "senior," being from a supranational bailout agency, and thus immediately subordinates all the other debt of Spain, which guarantees repayment; and of the banks (which also, already, owe 330 billion euros to the very-senior ECB, which tolerates no "haircuts" on its loans). So, these loans must be repaid even if other Spanish government and bank debt is defaulted to do so, and all "markets" know this; there is no prospect of economic expansion which would enable Spain or its banks to magically service more debt than the debt they couldn't keep servicing before the bailout.
So the results of this bailout, like Greece's, was prefixed: Spain will be further downgraded, Spanish banks will be further downgraded, and by contagion, Italian, French, etc. sovereigns and banks will be downgraded; etc. — while Obama/Geithner, Cameron/Hague, Madame Lagarde, and the EU bureaucrats demand a further, more huge bailout, likewise built to fail.
It might also occur that the Spanish bailout, announced to have no austerity "conditions" because "Spain is in a recessionary situation", will thus strengthen the anti-austerity forces in the election in Greece, which is in a depressionary situation.
Since the Spain bailout has failed before it has happened, the best course would be not to carry it out at all; that depends on Glass-Steagall enactment, fast, and first in the United States.